**FILE** In this May 8, 2008 file photo, an Ebay/PalPal sign stands outside Ebay offices in San Jose, Callif. EBay plans to move nearly all transactions to electronic payment methods. Beginning in the U.S. in mid-October, users will have to pay by credit card, PayPal or the credit card processing service ProPay. No more cash, checks or money orders _ which account for less than 10 percent of eBay transactions these days _ unless sellers and buyers meet in person. (AP Photo/Paul Sakuma, file)

Photo: Paul Sakuma, AP

**FILE** In this May 8, 2008 file photo, an Ebay/PalPal sign stands...

When he can, Jonathan Fleming uses PayPal instead of a credit card to shop online, whether to buy a television from Amazon.com or tickets from Southwest Airlines.

To pay contractors, the Oakland real estate agent again relies on PayPal's online payment service. He's even planning to use PayPal to collect money from people who buy a real estate book that he hopes to self-publish.

Long the payment service of choice on eBay, PayPal is quickly gaining momentum on the Internet at large by adding new merchants and users. Highlighting its broader appeal is this financial milestone reached last year: For the first time, the majority of PayPal's revenue came from sources other than eBay.

PayPal's success is a rare bright spot in an otherwise struggling portfolio of products at eBay, its corporate parent in San Jose, which is being buffeted by the slumping economy.

Top executives recently declared PayPal a pillar of eBay's turnaround strategy and predicted that PayPal would become the company's biggest source of revenue within the next few years, surpassing eBay's troubled online marketplace.

Expanding e-commerce

Scott Thompson, PayPal's president, said PayPal has the potential to become part of every e-commerce transaction. Nonprofits, government and political campaign donations offer more possibilities, he said.

"Last year, during the presidential campaign, who knew that those 'donate now' buttons would pop up everywhere," Thompson said, citing just one of the many inroads he's seeing by PayPal.

EBay bought PayPal in 2002 for $1.5 billion after the payment service gained widespread popularity on eBay's marketplace. Users preferred PayPal's simplicity to Billpoint, a rival system that eBay developed.

The acquisition is now considered among eBay's shrewdest business decisions. It is a sharp contrast to eBay's high-profile $2.6 billion acquisition of online calling service Skype, which was initially billed as an easy way for eBay users to talk to one another, but has since been declared a dud. In April, eBay management said it would unload Skype in an initial public offering.

The sour economy and stiff competition has wreaked havoc on eBay's marketplace, causing its first-quarter revenue to fall 18 percent to $1.2 billion. People are reining in their spending or fleeing eBay in favor of rivals such as Amazon.com, thereby reducing the fees eBay collects on transactions.

Meanwhile, despite the gloomy economy, PayPal has continued to grow. First-quarter revenue from payments rose 11 percent to $643 million, largely because of the increased use of PayPal outside of eBay.

Handling transactions across the Web, regardless of the merchant, presents a huge opportunity for PayPal. This year, it is expected to be the third most popular way to pay online, accounting for 15 percent of all e-commerce sales, behind credit and debit cards, according to Celent, a financial services consulting company.

After attracting small and medium merchants in recent years, PayPal is increasingly trying to lure more large retailers. Almost one-third of the top 300 online merchants already accept payments via PayPal, including Dell.com and Apple's iTunes.

"That opens PayPal to a bigger market, even bigger than on eBay's marketplace itself," said Sandeep Aggarwal, an analyst with Collins Stewart.

Last year, eBay's streak of providing more than half of PayPal's revenue ended. Merchants outside of eBay tilted the balance with their increasing numbers and expanding sales.

Although eBay's marketplace remains a big source of business, its troubles are weighing on PayPal. Because of the slowdown, PayPal is adding fewer customers than it otherwise would and dampening growth in the volume of transactions it handles.

Thompson said that if he had a choice, eBay's marketplace would remain larger than PayPal, despite predictions by the company's management that the balance of power will eventually shift.

"My hope, being in the family, is that eBay always stays bigger than us because that would mean it's having great success," Thompson said.

Parker Nolan, a clinical trials consultant from San Francisco, said he's used PayPal to buy imported food, in addition to making transactions on eBay. He said the service makes shoppers more comfortable because PayPal covers most fraud.

"It's secure, it's easy, and you have to set it up just once," Nolan said.

People generally fund their PayPal accounts by linking them to their credit cards or bank accounts. The service acts as a sort of middleman between buyer and seller, shuttling money electronically between the two.

PayPal makes money by charging sellers a commission for every transaction. With millions of transactions per day, the fees add up.

Revenue at PayPal is expected to soar from $2.4 billion in 2008 to up to $5 billion in 2011.

Amazon.com and Google offer competing payment services, but they have had limited success. For instance, PayPal's traffic was 67 times greater than Google Checkout in April, according to online measurement firm Hitwise.

Of course, PayPal has its detractors. Users sometimes complain about their accounts being frozen for days or weeks if suspicious transactions are reported or detected, leaving them without access to any money deposited.

New credit service

Later this year, PayPal plans to integrate its service with Bill Me Later, a $945 million eBay acquisition from last year. It's another prong in eBay's payments strategy, in this case to offer merchants a way to attract buyers by offering them free credit.

But the timing of the Bill Me Later acquisition is questionable. With the credit crunch in full force, the risk is that customers simply don't pay.

Still, Thompson voiced optimism in PayPal's future, even if the economy remains in a slump.

He cited PayPal's potential on mobile devices such as Apple's iPhone (mobile payments currently account for less than 1 percent of all PayPal's transactions) and an upcoming initiative in micropayments, the small transactions involving people paying small amounts for access to news articles, among other things.